One of the most important parts of your financial well-being is your credit score, especially when it comes to getting a home mortgage. Your credit score has a major impact on the cost of the rate you get. And unfortunately, credit scores and the processes that determine them are beyond most consumers, us included. That is why it helps to get educated on the simple financial changes most of us make – such as closing a credit card.
Our friend, Ken Strey of Scorewell Inc. in Walnut Creek, offers this explanation on what to be aware of when considering closing credit cards…
“If all of your cards have zero balances then you have nothing to worry about, whether you close cards or leave them open. However, if your credit reports show balances on any other cards then read on, as closing cards could hurt your score if you’re not careful.
Credit utilization is the scoring formula’s way of assessing how much of your available credit is being used, with lower utilization leading to a higher score.
The following “before and after” scenarios will illustrate how impacts to utilization from closing cards can differ substantially, depending on whether or not you carry balances on any of your cards.
Scenario 1 (both cards have $0 balances):
Both cards A and B are open. Both have $0 balances. Combined utilization is 0%.
Card A is then closed, while Card B is left open. Both have $0 balances. Combined utilization remains at 0%.
Result: In scenario #1, despite removing $1,000 of available credit, which is what happens when you close $0 balance cards, there is no impact to utilization from closing Card A.
Scenario 2 (one card carries a balance):
Both cards are open. Card A has a $0 balance, while Card B carries a $500 balance. Combined utilization is then 25%.
Card A is then closed, while Card B is left open. Combined utilization increases to 50%.
Result: In scenario #2, removing $1,000 of available credit from the balance/limit calculations doubles the utilization percentage from 25 to 50%, despite the same amount of debt. While a doubling of the utilization percentage will not occur with every closed card, and your mileage will certainly vary in these situations, the simplest lesson to learn from this exercise is to keep cards open whenever possible, especially if you tend to carry balances on other cards.”
We hope this helps. If interested Ken can be reached at (925) 478-4732 or at email@example.com.